Assume that fast-food restaurants generally provide an ROI of 14%, but that such
ID: 2339991 • Letter: A
Question
Assume that fast-food restaurants generally provide an ROI of 14%, but that such a restaurant near a college campus has an ROI of 17% because its relatively large volume of business generates an above-average turnover (sales/assets). The replacement value of the restaurant’s plant and equipment is $192,000. If you were to invest that amount in a restaurant elsewhere in town, you could expect a 14% ROI.
Required:
a-1. Would you be willing to pay more than $192,000 for the restaurant near the campus?
a-2. What is the maximum price you would be willing to pay for the business? (Do not round intermediate calculations.)
b. If you purchased the restaurant near the campus for $233,143 and the fair value of the assets you acquired was $192,000, identify the account along with its balance, that is used to record the additional amount paid over the fair value of the assets.
Yes NoExplanation / Answer
Answer:
a-1)
Yes
1-2)
Return from the restaurant = $192,000 x 17%
32640
Minimum ROI required from the business = 14%
Maximum price for the business = $32640 / 14%
233142.86
Maximum price for the business = $233,143
__________________________________________-
b)
The additional amount paid will be recorded as goodwill
amount to be recorded as goodwill
= $233143 -192,000
= $41,143
amount to be recorded as goodwill =$41,143
Return from the restaurant = $192,000 x 17%
32640
Minimum ROI required from the business = 14%
Maximum price for the business = $32640 / 14%
233142.86